Monday, July 19, 2010

VC Funding Gaining Steam in California

Investment reached almost $4 billon in the state during the second quarter, a 51% gain from a year earlier and the most since the third quarter of 2008.

Venture capitalists are quietly reasserting themselves in what is one of the few bright spots for the California economy.

Venture capital investment reached almost $4 billon in California during the second quarter of this year, a 51% gain from the same period last year and the most since the third quarter of 2008. The number of companies they are funding also rose — up more than 8% to 296 compared with a year earlier, according to Dow Jones VentureSource, which collected the data.

Eventually this will mean jobs for California.

"The venture industry creates a lot of jobs because they are funding companies that are starting up almost from scratch," said Jessica Canning, global research director for Dow Jones VentureSource in San Francisco.

Venture capital investment is approaching its pre-recession levels, she said.

"This is good news," said Stephen Levy, chief economist and director of the Center for the Continuing Study of the California Economy in Palo Alto. "The investment will turn into jobs as some of these companies become successful."

Levy cautioned that the venture capital investment numbers represent a leading indicator for job growth and that the effects of the funding would take many months if not years to play out, "but as a first step it is very positive and probably along with the revival of business at the ports is the best economic signal going on for California."

Any upward eddy in jobs is of crucial importance to California, which some economists fear could fall into a double-dip recession.

On Friday, the California Employment Development Department said the state's jobs climate stagnated in June as part-time federal census workers lost their jobs and about 400,000 out-of-work people lost their unemployment benefits.

Although the monthly, seasonally adjusted unemployment rate crept down a tenth of a percentage point to 12.3%, the economy lost 27,600 jobs, the state said. California's unemployment rate was 11.6% in June 2009. Nationally, it hit 9.5% last month. Los Angeles' seasonally adjusted rate was unchanged from May at 12.2%.

The money venture capitalists poured into California in the second quarter accounted for slightly more than 51% of the $7.7 billion in venture capital put to work in 744 deals for U.S.-based companies in the period. The California money went into 296 deals.

The national funding was the highest quarterly total for capital invested since $8.4 billion was put into 699 deals during the third quarter of 2008.

Canning said signs of a resurgent venture capital industry also bode well for the national economy.

The investments demonstrated growing confidence in the financial markets — stock offerings is one of the methods venture capitalist use to capture profits from their investments. The investment also reflects a healthy corporate environment, she said.

"While initial public stock offering are the all-stars of the business, mergers and acquisition are the lifeblood for venture capitalists," Canning said. "Venture capital is impressed with the current round of corporate profits and believes that will give big companies the ammunition to make acquisitions."

Historically, venture capital investment has leaned toward technology and healthcare companies, -- which could help offset higher California health insurance quotes -- but the data for the latest quarter demonstrates that the funding is increasingly going to the energy sector — especially companies that supply the budding electric vehicle business and its infrastructure and renewable energy businesses, Canning said.

In California, renewable energy accounted for just 21 of the deals — not even 10% of the total — but represented $1 billion, or about a quarter, of the money invested, Canning said.

The San Francisco Bay Area, which dominated venture capital business in the state and the nation, had seven renewable energy deals, raising about $800 million. The biggest was a $350-million investment by VantagePoint Venture Partners, Morgan Stanley and other firms in Better Place, a Palo Alto provider of electric vehicle support infrastructure, Canning said.

California's renewable energy industry could be one of the biggest job providers, she said.

"This is a very young industry, essentially what the Internet was in 1998. The potential for that industry to grow is significant. We are just starting to scratch the surface," Canning said.

The second quarter was the first time that renewable and alternative energy venture capital investment in Northern California topped that for either healthcare or technology in total dollars, Canning said.

Venture capital investment in the Los Angeles metropolitan area represented a much smaller slice of the pie compared with the funds that get placed in the Bay Area, she said. The Los Angeles area accounted for $278 million in investment in 31 companies during the quarter, up from $111 million placed with 25 businesses a year earlier.

The Southern California deals also tend to be consumer-oriented businesses, such as the $31 million Insight Venture Partners put into HauteLook, an online private shopping club based in Los Angeles, Canning said.

Regardless of the industry, Levy said that the improved outlook for venture capital investment "debunks the idea that no body wants to do business in California. We continue to get half of a rising tide. This will take awhile but some success at these companies will lead to steady job growth."